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China's government should lower its GDP target to 6.5% next year instead of 7.5%, The International Monetary Fund said this Friday as the country's real estate market continues to decline.

Non-performing loans, shadow banking at the municipal level and housing woes were cited as the risks to China growth again next year, Alfred Schipke, senior resident representative at the , said at a news conference in Beijing.

"We recommend an upper bound of 7%, with a range of 6.5 to 7%. That will be a strong signal that you are moving ahead with your reforms and that these reforms will have some short-term adverse implications but that is necessary in order to create the fastest sustainable growth in the future," said Schipke.

If China continues with its sub-par investments at the local level -- pumping money into non-performing assets to maintain employment -- then a "hard-landing" remains plausible over the medium term, the IMF said its report.

China's president Xi Jinping should lower his expectations, the IMF warns.

China's current growth pattern has created a web of rising vulnerabilities, the IMF warned. To finance rapid investment growth, firms and local governments borrowed from both banks and non-bank entities (the so-called “shadow banks”). The result has been rising local government debt, many on loans to companies that often have no chance to service them.

In addition, many strands of the credit web run through the much-watched real estate sector. An abrupt adjustment in the near term is unlikely, but repeated use of this growth strategy would further weaken balance sheets, reduce investment efficiency, and leave China more vulnerable to shocks in the future.

China real estate prices continue to depreciate, much in line with Beijing's wishes. Prices dropped for the third consecutive month in July. New home prices slid 0.81% month-on-month in July, according to a survey of 100 major cities released on Friday by the China Real Estate Index System, a property market data provider.

Among the 100 cities, 76 recorded price declines and 24 had increases. Prices fell in all of the 10 biggest cities, including Shanghai and Beijing.

"Pressured by mounting inventories and high debt ratios, developers are discounting prices to make sure they achieve sales targets," CREIS reported.

The price dip in July came after several cities scrapped curbs on purchases to boost sales. As of Friday, 60% of the 46 cities that had such curbs had eased them in order to save developers from empty properties.

Zhang Dawei, director of market research at Centaline Property Agency Ltd, was quoted saying by China Daily in Beijing on Saturday that these measures are not enough to help the market.

Real estate accounted for roughly 15% of China's GDP in 2012, according to the IMF. The government has been trying to slowly pop China's housing bubble. Overall, prices have been rising steadily year over year.

Residential real estate inventories have increased most in Tier III and IV cities, as well as in the industrial northeast and parts of the coast, especially south of Shanghai. Commercial real estate in many cities outside of Shanghai and Beijing are in oversupply, a problem which continues to haunt the Chinese economy.

In terms of residential price dynamics, Tier II and Tier III/IV cities have performed the weakest, with prices in the latter group falling on month-on-month basis recently. The hardest-hit geographical areas include the industrial northeast and the south coast. Developers seem reluctant to cut prices because it may lead new buyers to stay on the sidelines and cause problems with investors that bought earlier at much higher prices.

The IMF said addressing these vulnerabilities and implementing structural reforms will reduce growth, but will bring "significant benefits over time in terms of higher income and consumption."